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Investment banks set to cash in early with Bristol-Myers/Celgene transaction

If shareholders approve Bristol-Myers Squibb Co.'s $95 billion acquisition of Celgene Corp., investment banks advising on the transaction will be one step closer to earning some $244 million in fees tied to the deal's completion.

Shareholders are set to vote April 12 on Bristol-Myers' acquisition of Celgene, a deal analysts have called the largest transaction in the pharmaceutical industry to date.

Investment banks typically earn the bulk of their M&A financial advisory fees when deals close. But on large deals in the healthcare industry, as is the case for Bristol-Myers/Celgene, it is not uncommon for companies to pay a portion of their investment banking fees before closing.

Healthcare's up-front fees

Investment banks advising on big transactions in the healthcare sector often receive a fee when the deal is announced, according to an S&P Global Market Intelligence review of disclosed financial advisory data on the 10 largest healthcare M&A deals based on transaction value. The review found that at least 15 financial advisers received payments around the time the deals were announced.

Former investment banker and Columbia University business school senior lecturer Donna Hitscherich told Market Intelligence that a sale of Celgene's magnitude requires the bulk of the work up front for advisers, and the possibility that the deal will not close motivates banks to negotiate for fees earlier on.

"It is reasonable, especially in industries where things that can happen from a regulatory perspective might be out of a bank's control, they would want to see more of that fee up front," Hitscherich said. "And even if it is a 100% that it's going to close, I'd rather be paid today than six months from now."

On the Bristol-Myers and Celgene transaction, buy-side adviser Morgan Stanley received $15 million at the deal's announcement and will receive another $67 million upon closing.

Celgene paid JPMorgan Chase & Co. $15 million for the bank's fairness opinion with the possibility of another $85 million upon closing. Sell-side adviser Citigroup Inc. picked up $10 million for its fairness opinion with another $57 million contingent upon closing.

Goldman Sachs Group Inc. in 2009 received about 30%, or $10 million, of its financial advisory fee when Merck & Co. Inc. announced its $48.02 billion transaction for Schering-Plough Corp.

The financial advisory fees on the Bristol-Myers and Celgene tie-up are not dissimilar to payments that investment banks earned on other large healthcare deals. The disclosures show investment banks stand to earn a total of $304 million in financial advisory fees if the Bristol-Myers and Celgene deal closes.

On Takeda Pharmaceutical Company Ltd.'s approximately $79 billion deal agreement for Shire PLC, the companies are paying a combined $261.7 million for "financial and corporate broking advice," according to a November 2018 document from Takeda. However, the Takeda document did not specify if the fees were paid upon announcement or break down how much each investment bank on the deal received.

Announcement vs. fairness opinion

When fees are paid to an investment bank before the closing of a deal, they often come in the form of either announcement fees or fairness opinion fees, as seen in the payments made so far by Bristol-Myers and Celgene.

An announcement fee is paid to the bank in return for preparing the transaction.

A fairness opinion, on the other hand, is a report that analyzes the facts of a merger to determine whether the deal will be fair for the buy-side and the sell-side. These are paid in advance to ensure an unbiased opinion, Hitscherich said.

On the 10 largest healthcare M&A deals announced since 2009, at least 13 investment banks received payments for delivering fairness opinions ahead of the deal announcements. Unlike with announcement fees, investment banks regularly receive payments when they deliver the fairness opinion.

Hitscherich said it is reasonable for investment banks to negotiate for announcement fees, particularly on deals that might take longer to close or where regulatory complications are possible.

"All of the heavy lifting has already been done by the bank," Hitscherich added. "They're not going to turn around and abandon the client, but a lot of the work has been done."

Fee disclosures in a nutshell

Companies do not always disclose financial advisory fee payments. Hitscherich explained that companies are not required to disclose "immaterial" fees below a certain threshold.

As for the makeup of the payments, Hitscherich said it is possible that investment banks will be motivated to push for up-front fees if deals face a higher closing liability.

"Whatever the conditionality of the deal is and the things that have to occur before it closes are going to influence parties' views on contingent fees," Hitscherich said. "And in industries like healthcare where you have potential third-party regulation and other things, those could definitely play into it."

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